Karl Marx famously wrote that history tends to repeat itself -the first time as tragedy, the second as farce. The European economic situation can certainly be described as a Greek tragedy that has once again lapsed into farce with a decision this week to "kick the can down the road" by extending the bankrupt country's bailout for four months.

The other farce that played out last week was the U.S. stock market taking the Greek drama seriously enough to use it as an excuse to rally to new highs.

Greece can never flourish economically within the European Union and the four month life-line it received this week won't change that.

And the U.S. stock market doesn't need any excuses to keep rising as long as global central banks keep printing money like drunken Greek sailors.

A Strategy of Self-Interest

Greece is hopelessly insolvent and can never compete economically as long as it is tethered to the single European currency (the euro). It remains in Germany's self-interest to keep Greece and other weak southern European countries such as Spain, Portugal and Italy inside the Eurozone to keep buying Germany's exports with euros.

For that reason, the odds of Greece leaving the Eurozone are very low despite the threats being traded between Greek's socialist government and German bankers. In the end, a deal will be worked out that will keep Greece under the thumb of its northern neighbor and keep the Eurozone intact.

Last week, Germany gave Greece a four month extension to negotiate new bailout terms. Greece was hoping for six months but settled for four. The deal temporarily stemmed a run on the country's banks and calmed financial markets.

Under the agreement, Greece has to present a list of budget cuts and economic overhauls on Monday that will satisfy European officials. Once those measures have been implemented, Athens will receive more money to keep it afloat.

Four months from now, this farce will be repeated and another deal will be cut. In the meantime, Greece will remain in what amounts to a depression and an entire generation of its young people will seek opportunities abroad.

But other than a few contrarian hedge funds, global stock investors don't care about Greece. They only care whether central banks will keep printing money that in turn will keep inflating stock prices. And the answer is that central bankers will keep doing what they have been doing. They don't know what else to do.

Seven years after the financial crisis, they haven't figured out how to stimulate economic growth in any other way. And their fiscal policy mates remain asleep at the switch. They know they are the only game in town.

The Illusion of Stability

Investors are so smitten with the power of central banks to pump up stock prices that they can ignore deteriorating geopolitical conditions around the world. ISIS continues to cut a swathe across the Middle East and pose a serious global threat despite misguided assurances to the contrary from the Obama administration.

The much-ballyhooed truce in the Ukraine has turned into its own kind of farce, allowing Russian-backed separatists to keep fighting while Western leaders demonstrated once again that they have no desire to stand up to Vladimir Putin.

Ukraine poses a much bigger threat to global stability than Greece, but investors' are so desperate for any hint of stability that they fell for Mr. Putin's ruse and accepted a truce that was broken before it began. Ukraine will continue to fester and threaten the future stability of Europe as Europe wants continues to cede its sovereignty to Russia over time.

But as long as central banks keep pumping out money, investors won't care. Last week, the minutes of the January meeting of the Federal Reserve were released with few surprises. As always, this group of former tenured economics professors are torturing themselves over when they should start raising interest rates. If the majority of them had ever managed a business themselves, they might question whether raising rates by 25 basis points in June versus September is truly going to change the course of an $18 trillion economy.

The Fed is so far behind the curve on this that it has driven off the road entirely – rates should have been raised a year ago. Amid the delay, dangerous bubbles have developed in the financial markets. Stocks are not only trading at all-time highs but at near-all-time high valuations, while bonds are trading at both. Fed Chair Janet Yellen testifies before Congress this week and no doubt will offer further reassurances that the Fed is in no hurry to upset investors.

Focus on the Fundamentals

The irony is that investors are probably worrying more than they need to about a rate hike. Both the economy and the markets can handle 50-100 basis points of higher rates over the next year without falling out of bed. Several Fed officials have warned that the Fed is likely to start raising rates around a June time-frame, which is still four months away.

Investors should pick up their dictionaries and look up the word "patient". Four months is a long time in market-time. June remains a good bet for when the first rate hike will come and it won't mean the end of the 6-year bull market. In fact, rising interest rates tend to coincide with higher stock prices since they tend to signal a strengthening economy. And historically there has been more than a two-year lag between the beginning of rate hikes and the start of a bear markets.

A Fed rate hike won't be the reason the bull market ends. That will happen if the economy keeps weakening. Stocks are trading at elevated valuations while earnings estimates are dropping, so investors should proceed with caution and avoid the most overvalued sectors of the market.

The party on Wall Street continues. Last week, the Dow Jones Industrial Average added another 121 points or 0.7% to close at a record high of 18,140.44. The S&P 500 gained 0.6% or 13 points to end the week at a record closing high of 2110.30. And the Nasdaq Composite Index moved closer to regaining the heights of the Internet Bubble, gaining 1.3% or 62 points to close at 4955.97.

In sharp contrast to stocks, bond prices moved in the opposite direction. The yield on the benchmark 10-year Treasury bonds jumped to 2.14% from 1.985% a week ago and is now up almost half a point from 1.67% at the beginning of the month.

This huge 28% move in yields has thrown a wrench into the forecasts of some of the most prominent bond investors in the world who have been betting on lower rates. The ten year Treasury yield is now roughly where it began the year (2.17%). It appears that fourth quarter GDP will come in around 2% and first quarter GDP may also come in around that level (partially hurt by the polar weather hitting the country).

Slow growth is consistent with forecasts for lower bond yields. Slow growth also makes it more difficult for stocks to keep rising even if central banks keep pumping out money around the clock. With earnings estimates and GDP growth coming down, stocks are simply defying gravity.

This is exactly the accurate analysis. The central banks will reach a time when money printing will have to cease. Floating the world's economies can't go on forever. Fiat currencies are in the middle of the scary situation. Of course we have currency wars in
progress magnifying the severity of the situation and mistrust among countries globally.
Keep telling it like it is.

Right on! Excellent summary of the macro situation. Germany will not allow open conflict with Russia at any price. Ukraine is basically a geographic expression without ethnic or other basis for unity. If you have spent 4 hours in Athens you understand the 'Greek' problem. No banker in his right mind would loan Greece carfare. German and other bankers are responsible for allowing a profligate nation to borrow irresponsibly. They are more to blame than the Greeks who quite sensibly took the money and ran. The US has more pies than fingers to put in them, and our financial rather than industrial/production economic 'recovery' can't stop, or the Ponzi scheme will collapse. Time to be very careful, go to 80-90% cash, select stocks for short term gains, and pray.

Greek issues are long standing ;Some solution might be sought as we have in times past and present in the USA using "control boards to oversee our municipal governments . The control board stays until the community cleans up it's act .Yes, this would be difficult to implement on a national basis and meet with resistance from an array of factions within and outside of Greece .However if such a plan was implemented through a prism of economic support such as economic elopement through tax incentives that would extend to other Euro countries and other countries willing to "get their feet wet" reducing their tax collections a bit to prop up Greece . Some day the bill in Greece will have to be paid and the outcome will be loan defaults and serious social issues when people must be taken of the "DOLE" .Other countries may not be so quick to demand the same treatment ( Bail outs connected with a control board ) Reporting to a tight fisted control board takes the "EGO out of the FREE GO" so to say .It is easy to believe that no politician wants a Control Board . However, Control Boards have in the past fostered Fiscal responsibility . "Hope springs eternal"

QE will start again, the US will not raise rates until they are forced to by geopolitical market forces, and the whole house of cards will fall. a mathematical certainty as history always shows. Yes people are stupid, i have learned to accept that. You don't want everybody to catch on….got to let the sheep walk to the slaughter house by themselves,…will need food then. Never forget the 80/20 rule also known as the Pareto principle. …in this case 20% are awake and are aware of what's going on while 80% doesn't. And that's ok. Just accept and move on…..

Julie, The answer to that is never. What you must do is adjust your positions to avoid too much exposure to companies that will be adversely affeted by whatever economic scenario you consider most likely. Also remember that capital does not disappear. It just goes somewhere else. When large capital outflows occur from the stock market that is the time for either holding on to your positions or buying more. Remember Warren Buffets two rules of investing. Rule One is Never lose Money. Rule Two is Never forget Rule One. Therefore never sell your positions at a loss – ever.
It is also of paramount importance not to put all your eggs in the stock market basket. Allocate your assets such that too much exposure to one asset class will not sink your ship.
You will do just fine. Remember that the only people who lost money in 2008 are those that sold their stocks at a loss. Had they held their positions they would be doing very nicely right now. It is not easy to do but a whole lot easier if only part of what you own is stocks. The acid test is to ask yourself can you stay afloat if all your stock valuations were zero. If the answer is no then the balance of your assetts is not where it needs to be.

Like I said Julie – you will do just fine. Have patience and do not panic. As I recall a few months ago ebola was about to spread around the world and kill us all. Take what you read with a pinch of salt. people make money out of other peoples panic rections.

Foreign companiex should invest in Greece and exempted from tax in
Greece as well in their homeland. Employment will benefit and poverty
will be deminished .

EU residents should be exempted from tax when starting living in Greece
This shall bring labor oppertunities and consumption into Greece .

This will be less costly for EU partners than continueing pooring money into
a brook Greece economy with 176 x loss on BIP . The above has a better
change for the Greeks with 18x loss on their economy.

You're missing the same thing the wizards missed: The language barrier. No one who has spent his first 40 years speaking Dutch, or German, or Spanish, wants to move to Greece, even if his income would be tax exempt. Why bother? It's easier to get on the socialist dole in your home country, and …..hang out, man!
Learn a new language? Are you kidding me? My folks are here. My kids are here. My life is here. Listen to the tune "Take it Easy" by the Eagles, ..you'll get it.

Bravo Jeff Johnson. Someone I recently read (sorry, can't remember who, maybe Jim Rodgers) explained that the capital in the world is like a river which flows to the the best and safest earnings. Between the capital seeking safety and earnings, and the dollar rising

The Greek situation is tragic. My view as a resident of Italy– of the euro situation– is grim. There is not enough political union among the countries which have such disparate interests to support having financial union. For the euro to work the countries invovled would have to be like states with a federal government, yet there is not the possibility to do a functional version of this as the various countries' individual interests are far stronger than their identification as European. The euro is like a 4 wheel drive vehicle which has to drive over very rough roads, but has been built with no shock absorbers. It is slowly being beaten to pieces. There will have to be greater political union, or sooner or later, it will come apart. It looks like more of the latter is happening than the former.

The Italian economy is moribund. Italians identify far more as Italian than European and there is much antipathy toward Germany left over from the war. It does not look as if Italians will take the bitter pill of austerity that the Germans would like to force them to. The election of Renzi and the popularity of Grilli and the Five Star movement are indications of this. But Italy also suffers from serious political gridlock by strong vested interests, which block it from making the massive political reforms it needs to make. The vested interests in Italy, which include the bureacracy itself, write the laws and run the country for their own benefit. For one example, of how far they nwill go and what stupid laws they will make, they made a law in the last year or so that two artisans cannot work together, thus , for example–but by no means limited to this–thus for instance, removing the independent stone masons and brick layers from the competition for building restoration, as they cannot work without another stonemason or a manual laborer to help them. In ffectn the artisans who are part of the very lifeblood of Italy were swiftly knee-capped. What is the impact on the economy? In the case of the artisan stone masons and brick layers all the money will to go to the construction companies, who effectively cost about twice as much, meaning that many projects home restoration projects become unaffordable and will not be done. Thus the masons lose money, the building materials suppliers and architects and geometers lose money, and even the commune building departments lose money and will no longer collect the permit fees.Most of the reform efforts have had effects like this and have only served to burden the people more, encumber them more, and to put the brakes on what was left of the economy. The anti-corruption campaigns sound good in theory, but in practice they too put the brakes on the economy. In Italy they have put the taxes much higher because everyone pays a portion of them–in effect if the tax is nine, they pay five or three, but now that they are trying to end tax evasion, many businesses are having to close their doors, instead, as if they pay all the taxes, there is not enough left to make it worthwhile staying in business. The Italian economy like the bumble bee only flies because it is black.

You will see the same in Greece when they begin the corruption crackdown.Where the money went to in Greece when they crack down, will close its coffers, move the money out of Greece and not invest in, or spend money in Greece, resulting in a further downward spiral.

Greece is like a pressure cooker now, giving signs of exploding, but Germany and most of the rest of Europe has decided to turn a blind eye. The Germans have not figured out that when you put a fat man on a diet –employ austerity in the German economy, that is not the same as when you put a skinny man on a diet , in this case, severe, diet. The Greeks and all of us in Europe will pay the price.

Italy is said to be too big to bail, the amount of deficit versus GNP is now said to be as high as Greece's was when the took the first bailout. The economy is moribund what happens next?

Why would anybody take the risk of buying stocks in a market that could drop any day without prior warning, or buy bonds that pay near zero, when they could safely lend against low-price-point rental apartment buildings in first mortgage position which are fairly recession-proof and earn say 12% (1% every month)?

I generally agree with most of the comments here but remember that ultimately the value of a stock is determined by the profitablity of the company. Sure geopolitics and interest rates affect that (it affects different companies in different ways) but as a long term investor you should consider all of this as the noise which it is. If I recall, the investing world was coming to an end in 2000 after the dot.com boom-bust and then again in 2008 with the Lehman Brothers debacle. Stocks will never go up indefinitely and similarly never go down indefinitely either. I agree that Greece will never exit the Eurozone but the Euro is doomed anyway unless there is full and complete political as well as economic union. That has nothing to do with Greece which is a tiny economy any way and just does not stack up against the economies of China and rthe US. Perhaps a political union will happen sometime – but I really doubt that France will ever want to combine politically with Germany. Mark Carney, the Governor of the Bank of England has noted this already….without political union there can never be a true economic union.

So the astute investor will not have all his or her eggs in the stock market basket anyway (asset allocation) and will adjust those proportions based on a rational assessment of all the information. You must learn to differentiate between the noise promulgated by the talking heads on TV (designed to drive uninformed investors to do stupid things) and the real underlying economic events that truly shape the world. To some, Google is overvalued. To others the potential of that organisation is just getting started.

The commentator here considers that valuations are at all time highs. For all stocks that is not true for some, maybe. If a stock deserves that valuation based on its performance then it is not overvalued. The value of something is what the person on the other side of the trade is prepared to pay.

I've been selling puts since August 2013 with abandon. I quit this month. Premiums are so low, it's not worth the risk anymore. For instance, one month ago I could sell puts on GOOGL with a $ 450 strike for about $ 3.50 when the stock was slightly above $ 500. Good premium, good margin of safety. Today with GOOGL at $ 550, a March 20 put with a strike of $ 500 will barely give you $ 1!
Everybody is long it seems.

The IGNORANCE of Michael E. Lewitt, and also of the average person, concerning the absolute IMPORTANCE of a society's central bank to create its currency is becoming VERY alarming.

A nation's central bank is a CURRENCY MONOPOLY. Only a nation's central bank can create the currency used by the people of that nation. If the central bank doesn't create enough currency to generate the productive capacity of its citizens, the economy of that nation will FALL.

It's THAT SIMPLE.

The fact that every nation in the world no longer operates on the basis of its Gold supply should make obvious enough the fact that BONDS are now USELESS – WORTHLESS relics of the 'old' way of raising money for a nation.

In a world where sovereign nations can create ALL the currency their nation needs to stimulate their own national productive action – at will – PROVES that national bonds are meaningless.

The current confusion over how a fiat monetary system correctly operates and the current mindset that mistakenly continues to operate according to the rules of a global gold standard is VERY alarming.

The writer of this article is one of those 'confused & mistaken' people, and is spreading the disease with articles such as this.

Pay no attention to this 'confused & mistaken' person and go NO WHERE near his diseased perspective.

So many land mines out there. What will be the 1st one to get stepped on is the million dollar question. So now they say they've cleared the land mines but watch out for the next nuclear bubble explosion. Could be from anywhere and hit anytime. Time to preserve and persevere. Get locked and loaded and protect your what you value in life.

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